European Hotel Transactions 2003

This issue has been published by the London Office of HVS International 2003 Edition

Philippa Bock and Bernard Forster

Notable single asset transactions in Introduction European Single 2003 included the 404-room Principe he volatility in the hotel market in Asset Transaction de Savoia hotel in Milan to the Dorchester Hotel Group for 2002 continued into 2003 with € € events such as the war in Iraq and Activity approximately 275 million ( 681,000 T per room); the 141-room Quinta do the sudden and unexpected outbreak of espite the continued volatile SARS. However, while hotels are often trading conditions in 2003, the Lago Hotel in the Algarve to a the first to suffer during a challenging single asset hotel investment private investor for approximately D €35 million (€248,000 per room); business environment, hotels have the performance was particularly advantage of recovering more quickly impressive, achieving approximately the 212-room Le Meridien Barcelona than other real estate asset classes and €3.1 billion, just 3% below the record to the German open-ended fund € Deka Immobilien Investment for are considered to be a useful indicator high of approximately 3.2 billion in € € of future economic activity. Despite the 2001. During 2003, HVS recorded a approximately 87 million ( 410,000 continued decline in RevPAR in the total of 91 single asset hotel per room); the 167-room Ritz hotel in majority of European hotel markets in transactions of above €7.5 million, the Madrid to Orient-Express Hotels and Omega Capital for approximately 2003, single asset hotel investment criterion set for inclusion within our € € activity changed pace considerably; survey. Single asset transactions 125 million ( 749,000 per room); the meanwhile, portfolio and corporate represented approximately 47% of total 122-room Hotel des Bergues in Geneva activity remained at a similar depressed investment activity, which is much to Kingdom Holding Company for approximately €75.6 million level with the previous year. Overall, higher than in previous years, with the € HVS recorded a 21% increase in average at approximately 35%. In ( 620,000 per room); the 118-room total investment activity in 2003 contrast, during 2002 we recorded a Brown’s Hotel in London in a joint compared with the previous year, to total of 76 single asset hotel venture agreement between Sir Rocco approximately €6.6 billion. Hotel transactions, which represented a total Forte & Family and Halifax Bank of € Scotland for approximately €75 investment activity was fuelled by a sales volume of 2.1 billion, 30% lower € significant number of opportunistic than the volume achieved in 2003. This million ( 635,000 per room) and the acquisitions, as well as non-traditional increased level of activity in 2003 Mayfair InterContinental hotel in hotel investors seeking to diversify confirms the general consensus that the London to Radisson Edwardian Hotels for approximately €166 million their property portfolio and acquire majority of hotel operating markets are € higher-yielding investments. at a turning point. ( 575,000 per room). Despite the difficult trading conditions in recent times, it is Figure 1 Total Hotel Investment Volumes 1998–03 (€000,000s) interesting to note that the average price achieved per room has remained relatively static, decreasing by approximately 3% since 2001, to 12,000 approximately €175,000 per room. Due to historically low interest rates, 10,000 reduced gearing and limited supply growth in many markets, there 8,000 have been few distressed sales. Furthermore, these conditions have 6,000 enabled hotel owners to maintain greater control and not accept a price 4,000 that illustrates a depressed market, but instead negotiate a price that 2,000 reflects the future earnings potential of the property. Consequently, the — 1998 1999 2000 2001 2002 2003 strong recovery in single asset investment activity in 2003 was Single Asset Transactions Portfolio Activity achieved in tandem with a most respectable average price per room Source: HVS International Research sold.

HVS International European Hotel Transactions 2003 1 acquired from Accor SA and Accor Figure 2 European Single Asset Hotel Transactions 1995–03 Polska shares in Hekon-Hotele Ekonomiczne SA, which comprised 100 3,500 ten Accor-branded hotels in Poland, one Novotel in Vilnius and the 90 management contract to the 3,000 Mercure Frederic Chopin in 80 Warsaw. The transaction totalled 70 2,500 €92 million, approximately €55,000 per room; 60 2,000 • The sale of the budget hotel chain Premier Lodge, comprising 131

ransactions 50 units, some 8,500 rooms, following 1,500 40 Scottish & Newcastle’s divestment of its retail division for 30 € 1,000 Millions (Approximate) approximately 3.6 billion to Spirit Number of T 20 € Amber Bidco, a new company 500 formed by a consortium of investors 10 including private equity firms Texas Pacific Group and the Blackstone 0 0 Group and also comprising CVC 1995 1996 1997 1998 1999 2000 2001 2002 2003 Capital Partners and Merrill Lynch Global Private Equity; • The disposal of 13 Swallow Hotels Number of Transactions € Millions by Whitbread, some 1,148 rooms, to REIT Asset Management for a Source: HVS International Research consideration of approximately €74 million, approximately €64,000 per Portfolio approximately €3.5 billion, room. The hotels are to be leased to representing a 7% increase on the Maycastle Ltd, a subsidiary of The Transaction previous year, but this level of activity London Inn Group, which remained in a different league to the purchased the hotel operating Activity unprecedented volume achieved in business for a further €7.1 million; he consolidation and 2001, of €8.8 billion. Overall, the total • A hostile takeover bid by Jack globalisation of the hotel industry value of portfolio activity in 2003 Petchey’s Trefick vehicle resulted Tis likely to remain a key theme declined by 60% compared with 2001 in Hanover International being and have wide-ranging implications for and was characterised by small to acquired for approximately investment as hotel operators seek to medium-sized deals. €54.3 million, or approximately create or maintain footholds in key In 2003, significant portfolio €30,000 per room. Jack Petchey is strategic locations. The recent decline in transactions included: understood to have taken 2002 and 2003 of portfolio investment advantage of the depressed equity transactions, which is the overriding • The disposal of 37 Thistle-managed market to build a 49% stake in the cause of the fall in total investment Hotels by a subsidiary of Orb company prior to the takeover. volumes, is not considered to be a Estates to the property entrepreneur lasting phenomenon. Andy Ruhan, through his In addition to the above listed HVS International recorded 14 investment vehicle Atlantic Hotels, portfolio transactions, a number of portfolio transactions in 2003, for approximately €990 million listed hotel companies have been compared with 11 the previous year. In (approximately €181,000 per room); subject to management buyouts and 2003, portfolio activity represented • Orbis SA, the Polish hotel operator, privatised during 2003. We outline

Table 1 Selected Portfolio Transactions 2003 (€)

Number of Number of Total Sales Price per Portfolio Country Properties Rooms Price (€) Room (€) Buyer Thistle Hotels UK 37 5,454 987,000,000 181,000 Atlantic Hotels Starwood Hotels (Ciga properties) Italy 4 382 290,000,000 759,000 Colony Capital Accor Poland 11 1,677 92,000,000 55,000 Orbis SA Galaxie France 108 7,260 200,000,000 28,000 Duke Street Capital Accor (all leased hotels) UK & Netherlands 35 N/A 590,500,000 — Goldman Sachs Swallow Hotels UK 13 1,148 73,800,000 64,000 REIT Asset Management Accor Hungary 5 1,163 88,000,000 76,000 Erste Bank and Immorent Portfolio of Luxury Country Hotels UK 4 57 22,900,000 402,000 Von Essen Hotels Hanover International UK 15 1,789 54,300,000 30,000 Trefick – Jack Petchey

Source: HVS International Research

2 European Hotel Transactions 2003 HVS International below the various public to private Starwood will gain managerial control transactions that have taken place of the 126-strong luxury hotels Sources of during 2003. worldwide. Investment Capital The number of portfolio • Thistle Hotels was taken private by transactions in 2002 and 2003 has been n Europe a large proportion of the its major shareholder BIL far fewer than in previous years. quality hotel supply has International. The unconditional Capital sourced by private equity Itraditionally been owned by direct offer of 130 pence per share valued dominates portfolio activity, totalling investment. This has taken the form of the company at €880 million approximately €1.9 billion in 2003, mainly two options: owner occupation, (£627 million), significantly below which represents 53% of total portfolio whereby the owner controls both the the total hotel book value; activity. While hotel operators are also property and the business risk; or a • Macdonald Hotels was the subject the largest selling group, they still passive investment, whereby the owner of a management buyout through a remain active buyers, as hotel operators controls the real estate but divests of the company called Skye Leisure seek to build a dominant global business risk in the form of a lease or a Ventures, backed by Bank of presence. Meanwhile, sale-and- management contract. Scotland. The management buyout leaseback activity was used With cross-border activity on the offered 260 pence per share for the significantly less during 2003. increase, and as capital for hotel 100-strong group. Since the buyout, However, this structure remains investment becomes available from a 15 hotels, some 825 rooms, that do popular, particularly as a means for wider source of investors, the trend not fit within the company’s hotel owner-operators to raise towards indirect property investment is strategic plan, are reported to be on significant capital to expand, while becoming increasingly prominent. the market; continuing to operate the asset via lease There are many reasons for this, such • In a management buyout by or management agreements. Sale-and- as: Lioncourt Capital and Kayterm plc, leaseback activity is expected to remain Jarvis Hotels was privatised in a buoyant across Europe in the medium • An era of low inflation, low interest deal offering 140 pence per share. term. rates and a sustained negative The deal valued Jarvis Hotels issued The limited portfolio and performance on the equity markets share capital at approximately transactional activity throughout 2003 has driven capital towards real €225 million (£159 million). is due to investors and lenders erring estate. Due to an increased focus on the side of caution, the decline in towards a diversified portfolio, One further deal not included European-wide operating coupled with the desire to increase within our analysis involves the Le performance and the differentials returns, quality hotels are starting to Meridien portfolio, whereby between the bid and ask price. be considered as mainstream real Starwood Hotels & Resorts and Nevertheless, as the European market estate; Lehman Brothers Holdings have recovers and operating performance • An increase in the consolidation and shouldered all of Le Meridien’s improves, investor interest and globalisation of the sector has outstanding senior debt of some confidence will be revived, with resulted in seeking innovative US$1.3 billion. In 2004, Lehman and portfolio activity expected to be more means of financing. In the efforts of Starwood will set out to renegotiate Le robust in 2004, with private equity hotel owner-operators to gain Meridien’s refinancing, following continuing to be a major source of a global brand recognition, sale-and- which there is a strong possibility that capital. leaseback activity has become far

Figure 3 Portfolio Investment Activity by Buyer Category 2001–03

Private Equity

Joint Venture

Hotel Investment Company

Private Investor

Real Estate Investor

Institutional Investor

Hotel Operator

0% 10% 20% 30% 40% 50% 60% 70%

200320022001

Source: HVS International Research

HVS International European Hotel Transactions 2003 3 more widespread as a means of established hotel assets in prime investment in 2003 by private equity raising capital to fund expansion; locations, with a strong covenant and institutional investors remains • Increased competition amongst and a resilient cash flow; below the level recorded in 2001, these hotel operators to gain a global • Improving transparency and two groups jointly represented 27% of presence has resulted in greater knowledge of the industry among total single asset transaction volume in flexibility with respect to operating real estate, financial specialists and 2003, compared with 22% the previous agreements. As a result, the investors; year. The representation of non- acceptance of leases has become • The introduction of the euro has specialist buyers is likely to strengthen much more widespread, fuelling the removed many of the barriers in 2004, due to their continued desire to entry for indirect investment relating to foreign currency, thus build increasingly diversified vehicles; allowing the potential for greater portfolios, geared towards higher • The growing disparity between net cross-border investment and yielding investments. asset values of publicly traded hotel lending. companies and their share price has resulted in hotel companies going By reviewing the types of buyers Institutional private, such as Jarvis Hotels and active in the European hotel market, it Macdonald Hotels, as well as is evident that investment capital is Investors Thistle Hotels; available through a wide variety of he broadening of hotel ownership • Phenomenal growth in equity sources, although trade buyers to non-specialist investors has available from German open-ended continue to dominate the single asset Tresulted in the growing funds and US opportunity funds investment market. Institutional importance of lease structures as a has increased investment investors have continued to invest means of providing a more secure and opportunities. Meanwhile, in significant amount of capital into single attractive investment. Financial preparation for the implementation asset hotels, with investment totalling institutions and pension funds all fit of Basle II in 2006 (which governs approximately €600 million during under the bracket of institutional the international banking rules, 2003. Meanwhile, capital from private investors, which reap the benefit of regulations and standards), a equity investors, which has dominated lease structures, with the exception of reduction in capital available to portfolio activity since 2001, is less US private equity funds, who rarely hotel projects is likely, as banks influential with respect to single asset adopt lease structures due to their long- will be held accountable for investments. Nevertheless, single asset term commitment and perceived level operational risk and will require transactions from private equity of reduced flexibility. Lease terms are capital being held in reserve for investors totalled approximately increasingly moving away from fixed- protection against potential loss. €180 million in 2003, an increase of based rental payments to turnover- Consequently, increased debt approximately 43% on the previous based leases, which comprise a opportunities will exist for year. Although the combined volume of guaranteed component (base rent

Figure 4 Single Asset Hotel Investment by Buyer Category (by Transaction Volume) 2000–03

2003 2002 Hotel Investment Company 5% Private Equity Private Investor Private Equity 6% 6% Private Investor 6% 6% Hotel Operator Hotel Operator Real Estate 49% Real Estate 47% Investor Investor 13% 25% Institutional Institutional Investor Investor 21% 16%

2001 2000

Hotel Investment Company Private Equity Private Investor 10% Hotel Investment 23% Hotel Operator Company 26% 6% Hotel Operator 3% 43% Real Estate Private Investor Institutional Investor 8% Real Estate Investor 26% Institutional Investor 16% Investor 24% 15%

Source: HVS International Research

4 European Hotel Transactions 2003 HVS International which is normally fixed but index- linked to the consumer price-index) Figure 5 Total Investment Volume – Institutional Investors 2000–03 and a variable rent component, which offers a rental income linked to the hotel’s trading performance. Nevertheless, during the past twelve to 700 eighteen months, hotel operators have 600 become increasingly reluctant to sign 500 lease agreements because of the risks involved and the impact on the 400 Million

company’s balance sheet. € 300 Troubled times in the global stock 200 market have resulted in real estate becoming a desirable asset in which to 100 invest. Cross-border acquisitions of UK commercial property remained 2000 2001 2002 2003 respectable throughout 2002, with purchases totalling €10.5 billion1. Single Asset Portfolio Purchases by German investors have increased substantially since 2000, when it Source: HVS International Research accounted for just over 3% of total cross- border investment1. During the first quarter of 2003, the level of investment by this investor group accounted for an emphasis by German funds is placed catalyst in the development of the unprecedented 44% of cross-border upon factors such as the quality of the private equity market is due to legal investment. This can be attributed in part covenant and the location of the site to and structural changes, such as to to German open-ended fund activity. ensure that it is a viable long-term pension funds and insurance company Such conditions favour the hotel investment opportunity. regulations, which have allowed for the investment market, as there is an German funds operate under a liberalisation of investment choices. abundance of institutional capital seeking strong regulatory framework; for Consequently, the spectrum of a more diversified property investment example, funds must invest a minimum investors in private equity has portfolio, focused on real estate providing of 50% of their capital in real estate and significantly expanded. long term, secure income streams. their income must be derived through Private equity real estate funds, leases, thus making themselves suitable which have formed in recent years, to hotel investment. Furthermore, in have recognised the favourable German recent years, due to changes in conditions for investment in the hotel Germany’s legislation, the funds have sector. Low interest rates, a low Institutional Funds had to seek higher-yielding investments, inflationary environment, moderate erman institutional investors such as hotels, to compensate for the loss supply growth, anticipated increases include both open-ended and in tax incentives. German open-ended in cash flow in the medium term, Gclosed-ended real estate funds. A and closed-ended funds are expected to enhanced value potential and the major attraction for investors is that a continue to invest in hotels in order to availability of debt capital, are all significant proportion of the annual return comply with their diversification favourable conditions currently is tax-free, thus allowing funds to buy on strategies. Furthermore, recent changes available for hotel private equity lower yields, providing long-term, secure in legislation in 2002, aimed at increasing funds looking to take advantage of income streams. Open-ended funds are market transparency and providing well-located hotel assets across the property funds that invest directly in real greater flexibility to investors, has globe. Private equity funds are likely estate, offering shares to private investors. resulted in unresticted investment in to have greater access to debt at Examples of German open-ended funds assets located in countries outside of favourable lending terms than include CGI Commerz Grundbesitz Europe. So long as returns on the equity independent hotel investors, due to Investment, DIFA and Deka Immobilien. markets remain uninspiring and real their size, expertise, track record and Closed-ended property funds in contrast estate remains an attractive investment their diversified well-balanced are more complex and have developed class, German funds are likely to increase portfolio. more of a private structure and, as such, the liquidity of certain hotel markets in Traditional private equity funds they are less common. Examples of closed- the short-term and provide an important operating in Europe include ended funds include Dr Ebertz & Partner source of capital for the European Blackstone Group, Colony Capital, and Fundus. market. However, because German Strategic Hotel Capital and Walton An anomaly that has occurred in open-ended and closed-ended funds are Street Capital. All of these companies 2003, however, is the growing trend for considered to be long-term, low risk and have significant expertise in real estate German open-ended funds to invest in secure, the long-term liquidity of certain and are particularly skilled at hotel development projects, because investment markets may be impaired. sourcing and selectively acquiring this bucks the trend of investing in an single asset investments. Hotel assets asset with a proven track record. While of particular interest are sited in prime German open-ended funds are Private Equity locations, have a significant cash flow particularly sensitive with respect to Groups and have strong residual value their choice of asset investment, the risk enhancement potential through of investing in an asset under rivate equity groups have become creative and assertive asset construction is particularly higher than significant players in the management techniques. The Savoy investing in a going concern. However, PEuropean hotel market. One Group, the Four Seasons Milan and

HVS International European Hotel Transactions 2003 5 the Marriott Champs-Elysées are all examples of quality assets either Figure 6 Total Investment Volume – Private Equity 2000–03 currently or historically owned by these concerns. 7,000 Specialist Hotel 6,000 Investment 5,000 Companies 4,000 Million €

uropean specialist hotel 3,000 companies have developed E since the mid-1990s, but have 2,000 become more prominent and active 1,000 within the last five years, although they remain relatively few in — number. These companies offer 2000 2001 2002 2003 specialist expertise in the hotel market, hotel operations and Single Asset Portfolio business development. None of these companies operate outside Source: HVS International Research Europe and the majority focus within a specific area. For example, transparency and scrutiny in indirect Pandox operate predominantly in A REIT real estate markets, lower cost of capital Northern Europe, and Capona and Revolution? and access to the wider capital markets Dividum operate only in to help finance acquisitions and Scandinavia. Other similar traits n REIT is a listed or listable developments. However, capital include owning assets in strong portfolio real estate investment investment and expansion plans can be locations (such as in city centres, at Avehicle that has to distribute a limited by the REIT’s highly regulated airports or at convention centres), substantial proportion of its income to and restrictive structure and, and focus on core market segments its shareholders in return for exemption furthermore, listed REITs can (such as business and leisure). from corporation and capital gains tax. experience significant volatility in their Specialist hotel investment REITs originated in the USA, but have share prices. Nevertheless, REITs have companies’ income is derived since been introduced in a number of proven to lend themselves to the hotel through leases. Through a countries, including the Netherlands, sector, and remain popular, particularly combination of different lease Belgium, Japan, Canada, Italy, Australia to institutional investors who seek structures, they are able to add and most recently France. The UK and liquidity and diversification and value through higher cash flows or Germany remain the only two G7 longer-term security. We consider REIT through limiting the risk involved. countries without an equivalent structures to be ideal for UK provincial The structure of each lease is although, following recent moves by mid-market hotel groups, such as adapted to each prevailing the UK government, REITs are likely to Thistle or Macdonald Hotels, who, situation and can take the form of be introduced from 2005 and may regardless of the recent downturn in turnover-based leases, profit-based shape the UK property market of the the economy, have remained resilient. leases, fixed leases and operating future. The benefits of REITs include leases. improved liquidity and diversification, Exit Strategy flexible exit strategy is critical Figure 7 Total Investment Volume – Specialist Hotel Investment for a successful hotel Companies 2000–03 Ainvestment. With the growing trend of splitting hotel ownership from management on the increase, there is an increased pool of non-specialist hotel 600 investors. Failure to understand the fundamentals of the hotel industry, and 500 the importance of timing and the 400 cyclical nature of the industry, is simply a formula for disaster. Different owners 300 Million have different exit strategies. € 200 For short-term investments, investors need to understand and learn 100 to take advantage of the cyclical nature — of the industry, to redeem their assets at 2000 2001 2002 2003 the optimum time. It is therefore debatable whether for short-term hotel Single Asset Portfolio investments it is truly possible to separate the unique hybrid of business risk from that of real-estate risk, as Source: HVS International Research successful asset managers require a

6 European Hotel Transactions 2003 HVS International Figure 8 Total Hotel Investment by Buyer Category (by Transaction Volume) 2000–03

7,000

6,000

5,000

4,000 Millions

€ 3,000

2,000

1,000

— 2000 2001 2002 2003 Hotel Operator Institutional Investor Hotel Investment Company Private Equity

Source: HVS International Research sound knowledge of the hotel market. operator and the investor is likely to limited service hotels, thereby providing Understanding the cyclical nature of provide greater motivation to improve the potential investor the chance to hotels is therefore crucial as it results in performance (barring any non- achieve critical mass and increase their fluctuating revenue streams, thus the recurring, exceptional circumstances, willingness to pay a market premium, knowledge of understanding when to such as terrorist activity). As a result, this is less likely to be the case for an up- enter and when to exit is critical as it well-structured leases reduce market hotel group, where individual dictates the degree of profitability. US cyclicality and can have a direct and hotel sales are more likely to achieve a investors generally prefer short-term positive impact upon the cash flow and premium. The market positioning of the investments, shown in their preference hence the value of the asset. assets therefore also helps to determine for management contracts, which are Hotel investments, due to their the preferred exit strategy. generally considered to offer the increased volatility, are considered an greatest capital appreciation potential. opportunistic investment. During With respect to long-term investors, an troughs in the market when no debt Debt Finance acute knowledge of the cyclical nature of covenants have been broken or there is the hotel market and general no need to sell, it is generally unlikely otel lenders require a sound understanding of the fundamentals of the to achieve a hotel sale at book value (to knowledge of the cyclical industry is not as critical. Lease agreements a rational investor). However, it is Hnature of hotels, similar to that generally bode well for long-term important to note that, during the of investors, in order to gain an investors, and as such US investors are recent downturn in the market, values understanding of the potential return relatively few. German funds are an have declined but not to the extent of and risk exposure. Despite more example of long-term investors seeking a underlying profits, due to the sheer extensive cross-border activity by secure, sound investment. The addition of weight of capital looking to invest in lenders increasing the availability for hotels as real-estate assets helps to provide the sector and the general belief that the debt finance, the recent negative a balanced and diversified portfolio, market will recover. An example of downturn in the hotel investment cycle, enjoying a reasonable return over the long- which, is the recent transaction of the together with preparations for the term. Investors of this kind generally retain freehold interest in the Mayfair implementation of Basle II (resulting in the asset for between ten and 40 years. InterContinental in London. more rigid, and an increased number The ability to generate strong cash Exiting from a portfolio of assets at of, investment parameters), lenders flows and deliver value is dependent the optimum time requires a different have become more cautious. Lenders upon various issues, such as economic, exit strategy, because hotels within a are now extremely sensitive towards social and demographic trends, as well portfolio rarely perform uniformly, due choosing viable hotel assets in which to as the quality of the brand and the to the age of the asset, the market provide debt finance, preferring going efficiency of the management. positioning of the hotel, its location and concerns as opposed to developments. Structuring the lease or management the quantity of new hotel supply Factors that are taken into agreement is essentially governed by entering the market. In terms of portfolio consideration to ensure that the asset various factors, such as the type of disposals, the level of profitability is not generates sufficient cash flow in order hotel, an educated and informed simply dependent upon the stage in the to service debt payments include: understanding of the hotel market, the business cycle, but the age and physical selected operator and brand, and the condition of the various assets will • The location of the hotel, both on a length of the agreement. Structuring impact the future performance regional and local scale; the lease agreement or management prospects. Furthermore, while it is • The quality/star-rating of the hotel contract to link the return to both the advantageous to sell a large group of asset;

HVS International European Hotel Transactions 2003 7 • The appropriateness of the brand companies in the past year, compared ABOUT THE AUTHORS and the capabilities of the operator; with the early 1990s, despite hotel • The diversity of the hotel’s market trading conditions being the worst in segmentation, the suitability of its living memory for many hotel operators. facilities and amenities towards its Consequently, despite the continued market and its strategic positioning; difficult and challenging economic • The sales and marketing and environment within Europe, investor distribution strategies; confidence in the hotel sector is relatively • The structure of the lease or robust, with 2003 witnessing an management contract. increased number of single asset hotels available on the open market and the In recent times, the introduction of narrowing of the gap between bid and the euro has encouraged cross-border asking price. Furthermore, as investment and lending. However, institutional investors and other non- continued consolidation of the banking specialist hotel investors seek to industry, such as Royal Bank of Scotland diversify their portfolios, hotels are and Natwest, Bank of Scotland and increasingly considered a more Halifax, and the merging of Deutsche mainstream asset class. The pool of Hyp, Eurohypo and Rheinhyp, as well as capital available to hotel investment, several banks downsizing their both single asset and portfolio activity, is commercial real estate lending divisions, therefore widening. has resulted in a reduced number of With many European cities now hotel lenders. Nevertheless, as hotel positioned at the bottom of their trading Philippa Bock is an Associate with lenders seek high-quality assets with cycles, or showing the first signs of early HVS International’s London Office. She sustainable cash flows, attractive lending recovery, this is likely to stimulate an joined HVS International in February terms are available for such assets. increased level of investment activity. 2000 having worked in various manage- In light of the current economic Following significant portfolio activity in ment roles within the European hotel climate and with hotels severely affected recent years, hotel operators are likely to industry and holds a first class BSc by events such as terrorist activity, the forge ahead with disposal strategies of (Hons) degree in Hotel and Catering war in Iraq and the outbreak of SARS, assets not considered to be of a strategic Management from Oxford Brookes lenders continue to be more disciplined fit in an attempt to provide a welcome University. Philippa was responsible and conservative in underwriting debt. boost to share prices. For example, for the HVS Research department A review of the underlying loan InterContinental Hotels Group has before joining the consultancy team in conditions shows that hotel loan terms recently announced its intention to September 2001, during which time she in Europe are typically shorter, loan-to- dispose of 20 hotels, among which are pioneered the successful news journal value ratios have remained relatively several InterContinental Hotels as well HVS Hospitality Enews. Since then, she stable, at around 65%, and there has as former Posthouse Hotels. has conducted several valuation and been a moderate lessening of debt Consolidation is also anticipated to consultancy assignments in the UK and coverage ratio requirements. continue, as operators continue their Europe. With respect to the differences in drive towards global representation. lender preference between public and Various other portfolios rumoured to be private borrowers, this has narrowed in on the market include Queens Moat recent years. Previously, lenders Houses’ UK, German and Dutch favoured public companies due to their portfolios, the remaining Ciga hotels and lower risk profile; however, as a result of the Finnish hotel real estate company large-scale corporate scandal and the Dividum. Meanwhile, the explosion of improved profile of private equity funds equity capital, in the form of private and other institutional investors, the gap equity and German and American funds, is reducing. Portfolio diversification, is anticipated to increase for as long as both across different asset classes and the stock markets and other real-estate through geographical diversification, asset classes, such as offices, under- reduces risk exposure, thus allowing perform, and low inflation and low access to cheaper sources of debt finance. growth markets continue, leaving few A strong distinction continues to be alternative options but for investors to made, however, for private individual seek higher returns through portfolio investors with a lack of viable covenant. diversification and to include higher-risk asset classes such as hotels. Although the European operating Conclusions and markets remain volatile, the overall consensus is that the tide is turning Bernard Forster is a Director with Outlook and the outlook for the European hotel HVS International’s London Office. he more disciplined lending investment market is strong. We He joined HVS International in 1997, standards during the late 1990s envisage that 2004 will not only previously working in the IT sector as Thave helped to restrain over- witness a significant volume of single well as several years in various hotel supply and over-leveraging, and asset activity, but there will be a operational management roles in together with the low inflationary and notable increase in portfolio activity, Switzerland and London. Bernard low interest rate environment, the with the volume significantly greater holds an MSc in Property Investment majority of hotel owners have survived than that experienced during the past from City University London, as well the downturn in the hotel cycle. Apart two years. as a BSc in Hotel Management from from the difficulties experienced by Le Oxford Brookes University. He has Meridien, there have been no high- advised on hotels throughout Europe, profile bankruptcies affecting hotel 1Money into Property edition 28 – DTZ Research 2003 the Middle East and Africa.

8 European Hotel Transactions 2003 HVS International eloper lic domain ersicherungen acances rust linked to Sanvwa tone/Colony Capital in the public domain Hoteles ne Star and Caisse des Dépots du Quebec esham Hotel Group opical Hoteles SA r C r ony Murray T Not A Lo G Blacks Not in the pub Unnamed Dev Seller Government Pierre et V Strategic Hotel Capital Gresham Hotel Group Aoki Not in the public domain T Starwood Hotels and Resorts Not in the public domain Jurys Doyle Hotel Group Winterthur V Slovak Government Not in the public domain Unnamed Developer Private.T Gresham Hotel Group Marubeni Government Not in the public domain Private Individual NH Hoteles Jurys Doyle Hotel Group Orient-Express Hotels Lda A) tels Hotels rts Slovakia & 6b GMBH Co tel Group tor g mmobilien Fonds (DIF tel Group Globale AG Developments moselect weeney (Developer) x rtium, Eurohypo an Investor Plc nvest Im and Investments Beheer oodmead Ltd. estI estInvest ivacon igie-Finance ynch Ho AXA Hilton Zeel John S Conso Private Investor Hepton L Elite Caterin V Piramide Dorchester Ho Private inves Ramchand Bhawnani V W Budelli Pando Best Hotels W Diamond Hotels Accor Sachsenfonds Austri JJW Hotels and Reso Blackstone Group/Event Ho Deutsche I Blackstone Group/Event W Buyer DKV – German Health Insurance Company Alpha Baumanagement 000 18,000 14,000 Room 77,000 67, 33,000 83,000 57,000 61,000 89,000 73,000 59,000 1 1 150,000 221,000 288,000 122,000 226,000 213,000 681,000 248,000 122,000 126,000 156,000 276,000 220,000 181,000 Sales Price per 1,400,000 1,000,000 1,000,000 1,000,000 isclosed Sum 8,500,000 1 1 1 1 25,800,000 90,000,000 18,600,000 20,000,000 22,800,000 51,000,000 14,900,000 13,900,000 24,000,000 24,500,000 10,900,000 35,000,000 14,500,000 14,200,000 31,800,000 13,000,000 28,000,000 13,000,000 54,400,000 Sales Price 1 275,000,000 Und Undisclosed Sum Undisclosed Sum Undisclosed Sum Undisclosed Sum Undisclosed Sum 5 4 – 4 5 3 5 5 3 3 3 3 3 3 4 3 5 5 4 3 3 4 4 3 4 5 3 4 5 3 4 ) Star Rating € 5 9 3 1 1 1 84 90 96 50 1 1 1 200 337 600 169 338 177 182 365 445 168 150 106 141 404 181 356 177 179 222 192 403 348 543 301 Rooms reland Germany Germany Ireland Luxembourg Portugal Netherlands Germany France Bosnia-Herzegovina Germany Italy Ireland Croatia Ireland Spain Ireland Netherlands Ireland Germany I Portugal Belgium Italy Spain France Slovakia France Germany Germany Germany Germany Country TRANSACTIONS 2003 ( unich alway Bad Wörishofen Sintra Bad Homburg Co. Meath M Nice Florence Eemhof Split Sarajevo Killarney Luxembourg Limerick Brussels Adeje G Dublin Algarve Paris Amsterdam Dublin Milan Bad Nauheim Barcelona Frankfurt-Eschborn Paris Bratislava Berlin Munich Frankfurt City Düsseldorf ’ 1 Grand fices ara Hotel T Grand Hotel Lav Steigenberger Hotel Sofitel Grand Crowne Plaza – Brussels Nikko Hotel & Of Limerick Ryan Hotel Hotel Forum Property Holiday Inn Sarajevo Beau Rivage Hotel Marriott Champs-Elysées Grand Hotel Maritim ProArte Maritim Marriott Johnstown Hotel & Spa Jurys Killarney Ryan Hotel Angelo American Luxembourg Hilton Centre Parcs – Eemhof Penha Longa Golf Resort Hotel Ponderosa AC Front Maritim Steigenberger Hotel ‘Der Sonnenhof Galway Ryan Hotel Principe de Savoia Hotel Pierre Jurys Green Isle Hotel Quinta do Lago Dorint Hotel Holiday Inn – Munich Nord EUROPEAN SINGLE ASSET HOTEL

HVS International European Hotel Transactions 2003 9 Company aral estors untours Fastigheter AB Hoteles oteles tella Canaris NH H Grupo S Grupo Inmoc Exturga OHL German Inv NH Hoteles JM – Swedish Real Estate Seller Atrium JM – Swedish Real Estate Company Choice Hotels Scandinavia Le Meridien Occidental Hoteles NH Hoteles German Investors Sol Meliá Aspelin-Ramm Real Estate Group Riu Hotels & Resorts Riu Hotels & Resorts Resort España Occidental Hoteles German Investors Grupo Piñero S Le Meridien Arenamar Hoteles RS Hoteles S.A. Blancafort Grubarges Riu Hotels & Resorts AS s Omega Capital Gema Hoteles) Jaime Martinez Zapata d. Hotels Anker Holding up san MAC of els Scandinavia Forvaltning AB/Hospitium AB unas orweigan Insurance Company mobilien Investment g polis & La Caixa ise Beach Hotels ise Beach Hotels ipotels ital – N ital – Norwegian Insurance Company Lansber V Consortium Choice Hot Deka Im Grupo Lope Cesar Orenga Hoteles D Symbol Hoteles – H Metro Mediterranea In Sunrise Beach Grupo Playa Sol Sunr Sunr Grupo VMP Hipotels NH Hoteles Hot. Servi Gro Hotasa Jacamar (Socios de Orient Express Hotels/ Cargill Financial Market Elier Goñi Inmobiliaria Espacio Buyer Hotasa Expo Hoteles Metropolis & La Caixa V Hotasa ,000 16,000 18,000 12,000 Room 68,000 95,000 66,000 61,000 92,000 83,000 62,000 83,000 69,000 84,000 59,000 47,000 271 1 1 1 170,000 164,000 410,000 170,000 102,000 129,000 172,000 749,000 152,000 Sales Price per e 9,600,000 8,500,000 8,000,000 9,000,000 8,500,000 31,201,000 38,000,000 16,500,000 63,000,000 30,200,000 87,000,000 28,000,000 45,000,000 16,800,000 16,000,000 30,000,000 42,000,000 12,000,000 17,200,000 60,000,000 15,600,000 45,000,000 Sales Price 135,500,000 102,000,000 125,000,000 bove bove A Abov A egro Oasis All 5 4 3 4 3 5 4 4 4 3 4 4 3 4 2 3 3 3 3 4 4 3 4 5 4 ) Star Rating € 4 1 Included in Riu Maxorata above Included in Riu Maxorata above 50 62 56 1 500 242 184 542 184 212 238 685 277 173 294 506 195 130 100 724 641 330 167 401 1075 Included in Occidental Included in Inter Palace Hotel Included in Inter Palace Hotel Included in Nordic Light Hotel Rooms Spain Sweden Spain Spain Spain Sweden Sweden Sweden Spain Spain Spain Spain Spain Spain Spain Spain Sweden Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Country Spain TRANSACTIONS 2003 ( enerife enerife enerife enerife Barcelona Barcelona Barcelona Stockholm T Gothenburg Lanzarote Salou La Garriga Gothenburg Stockholm Lanzarote Gothenburg Fuerteventura T Fuerteventura Fuerteventura Ibiza Coñil Fuerteventura Madrid Mojácar T Fuerteventura Jerez de la Frontera T Madrid Benalmàdena Cádiz Madrid Seville City Oasis eguise T 1 1 Angelo rida mango a entura T a T Le Meridien Barcelona Royal Sherry Park Scandic Hotel Opalen Property NH Sant Sol Patos Flamenco Coñil Riu Maxorata Riu Cala Balneario Blancafort Occidental Gran NH Lagasca Marina Golf-Playa Alcora Canarife Palace Hotel Murillo Quality Hotel 1 Nordic Light Hotel Nordic Sea Hotel Garonda Jandía Stella Canaris Regina Gran Hotel Inter Palace Hotel Bahia Sur InterContinental Princesa Sofía Riu V Occidental Allegro NH Breton Quality Hotel 1 The Ritz Bonanza Palace EUROPEAN SINGLE ASSET HOTEL

10 European Hotel Transactions 2003 HVS International filiate of UBS) AB ed Football Club itality Group omt ndividual rust linked to Sanvwa Real Estate fles Holdings Ltd Meridien estmont Hosp ollhattan T r azard e Meridien L AC Le L Ascott Private I Private Manchester Unit Landsmark Ltd W Seller Peter de Savary Le Meridien InterContinental Hotels Group PrivateT Queens Moat House Lazard Countess de Chastenet du Puysegur Lazard J Leon & Co Le Meridien Private BHAC (Blackstone/Colony & co investors) Le Meridien T Le Meridien Société Nouvelle des Bergues (af Raf Historic Hotels (Richard Broyd) Nexus Hotels CRD Catering (City) Ltd aleed Al-W visors Ad d by Peter de Savary) d ction Hotels Group Hotels erties Hotels Edwardian Hotels Holding Company (KHC)/Prince ulip UK Hotels nvestors of the Carnegie Club T g sen Hotels n Group kstone Group on Essen on Essen Hotels on Es Pandox Radisson London Plaza Aconfla Private I Menzies V The Mantis Colle Kingdom O & H Properties V Furlong Hotels Lt Carnegie Club (owne Prima Hotels Feathers Group Leading Hotels Fund Golfrate Prop Quintessential Hotels Private Britannia Hotels Blac Private Investor V Marston Hotels Quintessential Golden Mastcraft Mondiale Buyer Quin Sir Rocco Forte & Family plc/Bank of Scotland Corporate Banking 19,000 Room 49,000 75,000 69,000 31,000 575,000 309,000 620,000 926,000 635,000 992,000 1 181,000 355,000 444,000 326,000 306,000 141,000 107,000 252,000 162,000 132,000 680,000 349,000 148,000 463,000 625,000 1,406,000 Sales Price per Above 1,100,000 1,400,000 1,600,000 1,400,000 9,700,000 8,800,000 13,600,000 32,200,000 1 1 1 1 19,400,000 22,700,000 14,200,000 14,500,000 46,400,000 75,600,000 21,100,000 12,100,000 71,300,000 16,400,000 74,900,000 19,300,000 26,300,000 12,900,000 22,700,000 18,500,000 20,000,000 15,200,000 Sales Price 166,200,000 ) Undisclosed Sum Undisclosed Sum € 4 5 5 4 4 3 4 5 5 5 5 5 4 4 5 4 4 5 4 4 5 4 4 4 4 4 5 4 Star Rating Aparthotel Included in Royal Crescent Hotel 8 9 1 1 64 32 35 47 33 69 86 77 65 13 65 64 40 1 1 196 221 289 107 149 122 108 128 199 238 363 218 160 128 Rooms weden UK S UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK Switzerland UK UK UK UK UK Country UK UK UK UK TRANSACTIONS 2003 ( von ake purchased arwick rollhattan London London London Edinburgh London London T Devon Bath London Chester London Edinburgh London London Leeds Geneva Cotswolds London W Stratford-upon-A Edinburgh Scottish Highlands Blackpool Cheshire Berkshire City London London Manchester Nottingham 2 2 2 fices arwick Arms own House lip Hotel (25% Stake) T u T errace Hotel s Hotel T ygon elcombe Hotel Sale price includes of The price per room has been adjusted in order to reflect the st Queens Hotel The Hempel Hotel Manor House Hotel W Brown’ Sherlock Holmes Hotel Marriott Grosvenor Square Hotel Royal Crescent Hotel Property Hotel des Bergues Cliveden Crewe Hall The L Dalhousie Castle Hotel Crowne Plaza Bentley Hotel, Harrington Gardens (50% stake) Quality Hotel Crystal Palace Cliveden Draycott House Mayfair InterContinental Somerset Kensington Gardens (50% stake) Golden Skibo Castle Le Meridien W Scandic Hotel Swania Le Meridien Chester Cadogan Hotel Kensington Moat House Norbreck Castle Royal Holiday Inn, Castle Marina EUROPEAN SINGLE ASSET HOTEL 1 2

HVS International European Hotel Transactions 2003 11 Offices and Services

Europe South America HVS Dallas HVS SERVICES HVS London HVS São Paulo Suite 101 Russell Kett Av. Brig. Faria Lima 2601 Sagebrush Drive 1912 cj.7F Charles Human Flower Mound, TX, 75028 01452-001 São Paulo/SP Simon Hudspeth Consulting Services Brazil USA Dominique Bourdais (55) 11 3093-2743 (972) 899-5400 Bernard Forster (55) 11 3093-2783 (fax) (972) 899-1022 (fax) Valuation Services 14 Hallam Street London W1W 6JG HVS Buenos Aires HVS Denver Investment Services & UK San Martin 640 – 4° Piso Suite 906 (1004) – Buenos Aires (44) 20 7878-7700 1777 South Harrison Street Argentina Brokerage (44) 20 7436-3386 (fax) (54) 11 4515-1461 Denver, CO, 80210 (54) 11 4515-1462 (fax) USA Timeshare Consulting HVS Madrid (303) 512-1222 Laurent de Kousemaeker North America (303) 691-3799 (fax) & Resort Paseo de la Castellana 93-2º HVS New York 372 Willis Avenue Madrid, 28046 HVS Washington DC Mineola, NY, 11501 Development Services Spain Suite 102 (34) 91 597-4635 USA (516) 248-8828 1300 Piccard Drive (34) 91 597-3054 (fax) Asset Management (516) 742-3059 (fax) Rockville, MD, 20850 USA Asia & Operational HVS San Francisco (240) 683-7123 HVS Singapore Suite 620 (240) 683-7120 (fax) 100 Beach Road 116 New Montgomery Street Advisory Services #32-04 Shaw Towers San Francisco, CA, 94105 HVS Chicago 189702 USA (415) 896-0868 Suite 1A Singapore Executive Search (415) 896-0516 (fax) 445 West Erie Street (65) 6293-4415 Chicago, IL, 60610 (65) 6293-5426 (fax) Capital Corp HVS Boulder USA 2229 Broadway (312) 587-9900 HVS Hong Kong Boulder, CO, 80302 (312) 587-9908 (fax) Organisational 183 Jade Villa USA Ngau Liu Chuk Yeung Road (303) 443-3933 Assessments/Performance HVS Phoenix Saikung (303) 443-4186 (fax) China 4913 E Mitchell Drive Cultures HVS Vancouver (852) 2791-5868 Phoenix, AZ, 85018 4235 Prospect Road USA (852) 2792 2358 (fax) N. Vancouver, BC, V7N 3L6 Convention, Sports & (602) 667-6655 Canada Entertainment Facilities HVS New Delhi (604) 988-9743 (602) 269-1864 (fax) C-67, Anand Niketan (604) 988-4625 (fax) Consulting 2nd Floor HVS Weston, CT HVS Toronto New Delhi, ND, 110021 262 Lyons Plain Road Suite 202 Riversbend India 2120 Queen Street East Food & Beverage Services Weston, CT, 06883 (91) 11 2410-1005 Toronto, ON, M4E 1E2 (91) 11 2410-1066 (fax) Canada USA Gaming Services (416) 686-2260 (203) 226-6000 Australia (416) 686-2264 (fax) (203) 221-0068 (fax) HVScompass Interior Design HVS Sydney Suite 101, Level 1 HVS Miami HVS Boston Suite 216 5 Elizabeth Street 4th Floor Marketing Communications 8925 SW 148th Street Sydney, NSW, 2000 Miami, FL, 33176 607 Boylston Street Australia USA Boston, MA, 02116 Technology Strategies (612) 9233-1125 (305) 378-0404 USA (612) 9233-1147 (fax) (305) 378-4484 (fax) (617) 424-1515 Hotel Parking Solutions © 2004 HVS International. All rights reserved. Hotel Management Published by: (US only) HVS International, 14 Hallam Street, London W1W 6JG Restaurant Management Tel: +44 (20) 7878 7700 Fax: +44 (20) 7436 3386 (US only) For further information please contact Philippa Bock or Bernard Forster, or visit our website at: Golf Services www.hvsinternational.com

12 European Hotel Transactions 2003 © HVS International